Is your model an ideology?

In finance, economics and (re)insurance (as elsewhere), it is accepted as a statement of the obvious that one’s model is only as good as the assumptions used to construct it. This depends upon our understanding of what the model’s purpose is; what we consider important; and what we omit.

Yet, as Karl Mannheim (a sociologist of the first half of the 20th Century, and yet another refugee from Nazism) pointed out: thinking (as in the construction of one’s model) is an activity that must be related to other social activity within a structural framework- i.e., in any complex environment, it never exists in isolation. It is, in fact, the product of a particular worldview and context, and so an ideology. Ironically (and echoing Marxism), this meant that any critique of an ideology was also ideological!

Having rescued ourselves from disappearing down that rabbit hole of Marxist dialectic, and barely avoided veering off into Platonic Ideals, the point to be made is that one must always test the assumptions used to build any model not only for their validity and relevance, but also for their origins. Are they the product of some currently dominant belief system, which may have introduced unconscious bias, or caused certain crucial factors to be ignored or overlooked? For, example, a Marxist, Keynesian, or Neo-liberal economist would approach the same issue, or particular fact set from very different starting points, and using very different mental “toolboxes”. As result, the outputs of their models, and so their consequences, would be likely to be very different.

Friedrich Hayek, the Austrian economist, was in no sense a member of the so-called “mathematical wing” of Economics, but rather set out models based upon his philosophical beliefs about the dangers of introducing any element of state influence into an economy. To claim that his most famous work, “The Road to Serfdom” (written in the depths of WWII), was “influential” is to understate the case. However, in reality, he had propounded an ideology, rather than created economic models, in the same way that Milton Friedman did a generation later. We live with the results still.

One might think that the world of (re)insurance must be above such influences, being devoted to the rational evaluation, pricing and management of risks across a broad spectrum of products. One might be wrong!

To give a couple of hypothetical examples: what if a Political Risk underwriter allowed his or her personal and subjective political beliefs to influence a decision, but in ways that were not visible in the underwriting file; or a D&O underwriter deliberately downplayed, or over-emphasized, certain risks to which a business was subject because of his or her own subjective beliefs about the particular industry in which it operated? Of course, any human being is subject to the consequences of his or her biases, preferences and beliefs, and “objective truth” can be a very elusive concept in many areas. However, the failure to consider relevant factors, or basing a decision upon a particular personal belief system, is, in reality, the product of ideology; which, quite interestingly, has an archaic usage referring to the science of ideas- i.e., the study of their origins and nature.

The team at Awbury is most definitely human, and a group with varied backgrounds and personal beliefs. However, we strive always to ensure that any models we build are fact-based and as free from any inherent bias as is possible, testing them to destruction to ensure their robustness.

The Awbury Team

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